Material is main current asset of business which is needed for finished product. It also has big proportion in total cost. These two points attract businessman to control the material, so that supply of stock should be continue without any delay and also it should be at optimum level without any over-stocking problem. For this, cost accountant has to use following techniques for controlling the material or inventory.
1st Technique : Setting of various stock level
In this technique of material control, we study and control by calculating different level of quantity of stock. With our past records, we have the data of normal usage, maximum usage, minimum usages, re-order quantity and minimum and maximum period and its mid will be average period. With this data, we can find following stock level
a) Re-ordering level
It is the level of stock quantity between minimum and maximum level and material order was sent for getting fresh stock.
formula
maximum usage of stock X maximum delivery period
b) Minimum level
It is the minimum balance, which must be maintained in hand at all times, so that there is no stoppage of production due to non availability of inventory.
Remember
You must need re-order level for getting it.
Formula
Re-order level - ( Normal usage X average period )
c) Maximum level
It shows maximum quantity which should be in the stock, if we buy more, it means we are wasting money.
formula
re-order level X re-order quantity - ( minimum usage X minimum period )
d) Average Stock Level
This is the average of minimum and maximum level and it can be calculated by adding minimum level and maximum level and divided by 2.
formula
minimum level + maximum level / 2
e) Danger level
It is the level at which normal issues of the raw material inventory are stopped and emergency issues are only made.
formula
average consumption X lead time for emergency purchases
2nd Technique : ABC Analysis
3rd Technique : Two Bin system
4th Technique : Continuous Stock Verification
Now question is how to remember above? Learn 10 tips for remembering.
1st Technique : Setting of various stock level
In this technique of material control, we study and control by calculating different level of quantity of stock. With our past records, we have the data of normal usage, maximum usage, minimum usages, re-order quantity and minimum and maximum period and its mid will be average period. With this data, we can find following stock level
a) Re-ordering level
It is the level of stock quantity between minimum and maximum level and material order was sent for getting fresh stock.
formula
maximum usage of stock X maximum delivery period
b) Minimum level
It is the minimum balance, which must be maintained in hand at all times, so that there is no stoppage of production due to non availability of inventory.
Remember
You must need re-order level for getting it.
Formula
Re-order level - ( Normal usage X average period )
c) Maximum level
It shows maximum quantity which should be in the stock, if we buy more, it means we are wasting money.
formula
re-order level X re-order quantity - ( minimum usage X minimum period )
d) Average Stock Level
This is the average of minimum and maximum level and it can be calculated by adding minimum level and maximum level and divided by 2.
formula
minimum level + maximum level / 2
e) Danger level
It is the level at which normal issues of the raw material inventory are stopped and emergency issues are only made.
formula
average consumption X lead time for emergency purchases
2nd Technique : ABC Analysis
3rd Technique : Two Bin system
4th Technique : Continuous Stock Verification
Now question is how to remember above? Learn 10 tips for remembering.
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